In keeping with our theme of beating the mainstream press by months and sometimes years — I always try to beat the Noble Laurelates by at least 6 months — I wanted to point to both the massive Krugman piece in the Sunday Times Magazine, as well as referencing similar themes we’ve hit upon over the past few years.

The Krugman article is here:

How Did Economists Get It So Wrong?
PAUL KRUGMAN
NYT, September 2, 2009

http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html

Our recent effort, from earlier this year, is here:

Why Economists Missed the Crises (January 2009)

http://www.ritholtz.com/blog/2009/01/why-economists-suck/

That piece included my top 10 indictments as to why the economics profession missed the crises until it was way too late:

1. An inherent upward bias is built into ALL Wall Street research — including economic research;

2. Ideological rigidity prevented creative thinking;

3. Non-critical acceptance of official data from BEA, BLS, Commerce led to only a passing familiarity with reality;

4. Institutional rejection of negative analyses remains endemic;

5. Traditional (non-behavioral) economic analysis seems to have difficulty with human irrationality;

6. Political Bias; (Right wing during GOP Presidencies; Left Wing during DEM Presidencies);

7. Corporate bias — Stock option compensation — skewed views too optimistic;

8. “Timing” is very different from Analysis;

9. Factoring in excessive leverage and liquidity is exceedingly difficult from a traditional economic perspective (Derivatives especially);

10. Herding instinct is powerful;

While Krugman drills deep into a few issues, notably, de-emphasis of behavioral economics and an anti-Kensyeian bias, his piece missed many of the causations.

This wasn’t the first time I pointed out the failures of economists as a whole. Back in 2005, I wrote the following for TheStreet.com:

The Mystery of the Awful Economists
Real Money, 3/2/2005 3:42 PM EST

http://www.cdn.thestreet.com/p/rmoney/barryritholtz/10211333.html

(If you cannot access the Real Money piece, click here).

That piece looked at why economists, as a whole, were so wildly overestimating job creation.

Nothing like beating the MSM to the punch . . .

>

Previously:
RIP Chicago School of Economics: 1976-2008 (December 23rd, 2008)

http://www.ritholtz.com/blog/2008/12/chicago-repudiation/

The Illusory World of Economic Forecasting (September 19th, 2006)

http://www.ritholtz.com/blog/2006/09/the-illusory-world-of-economic-forecasting

Read It Here First: “What Good Are Economists?” (April 25th, 2009)

http://www.ritholtz.com/blog/2009/04/read-it-here-first-what-good-are-economists/

Mystery of the Awful Economists, part 2 (April 2005)

http://www.ritholtz.com/blog/2005/04/mystery-of-the-awful-economists-part-2/

Mystery of the Awful Economists (Part III) (April 2005)

http://www.ritholtz.com/blog/2005/04/mystery-of-the-awful-economists-part-iii/

Category: Financial Press, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

41 Responses to “How Economists Got It Wrong”

  1. franklin411 says:

    Some historian, sociologist, or psychologist is going to make a mint writing a book about how the American economy was destroyed by brilliant men who based their world view on concepts that the average kindergartener can demonstrate as false.

    At any rate, thanks for the links. I did end up using Bailout Nation in combination with other links/sources (many of which I got here) to do my economic lecture, although I did come to a different conclusion about the bailouts. I called Bernanke and Bush the two heroes of the credit crisis. They may have helped create the problem, but it took courage to become apostates against the Chicago mafia.

  2. Onlooker from Troy says:

    John Mauldin refers to the Krugman piece in his weekly missive too and says there’s worthwhile info in there. Maybe I’ll bite the bullet and wade through it, but Krugman has been soooo terribly politically slanted and motivated for so long now (and please note, I really dislike Bush and his policies too; I, like others, find myself surrounded by mindless partisans) that he has almost completely discredited himself as an economist and is really hard to take.

  3. f411,

    you, consistantly, provide, pornographic, insight into the type of Individual you are.

    exhibit n: “At any rate, thanks for the links.”

    w/this: “..although I did come to a different conclusion about the bailouts.”, though, why not delineate your case?

    you know, endeavor to add something useful, beyond your offering of politico-babble, for a Change..

  4. Dire Turdly says:

    They’ll get it wrong when the tide changes, too. Here’s one who proposes, just to make sure that he can prove the worst case for the longest period of time, that all statistics should be measured against 2007 peaks – forever.

    http://fistfulofeuros.net/afoe/economics-country-briefings/p2p-in-the-spanish-economy

  5. Pat G. says:

    I read the Krugman piece on Real Clear Markets. It confirmed my theory that the economists will get it wrong on the exit side too, especially Bernanke.

  6. rootless_cosmopolitan says:

    Obviously, Krugman is a full blown Keynesian. Although his criticism toward the delusions of neo-classical thinking is rather correct, he is blatantly uncritical toward the failures of the economic explanations in Keynes’s tradition. If a Keynesian regulation of capitalism got it right and the rather correct path was supposedly chosen after WW II by adopting these views by government circles how come that these views were more and more abandoned starting from the 1970s and the neo-classical models and thinking have become dominant in the economic field and were adopted by governments? It’s like these views have mysteriously overtaken everything w/o any deeper cause and this has caused all the misery. As if there hadn’t been severe economic crisis in the 1970s and early 1980s and a big inflation problem at the end of several decades of Keynesian regulation.

    Additionally, there are certainly more in the economic field than the ones who represent neo-classical thinking or Keynesian views as counterparts to the former ones. For instance, the ones who analyze capitalist economy leaning toward Marx’s theory of value who are much more radical in their thinking and are looking at the first two ones from the side. Of course, they don’t represent mainstream in any way and the consequences from their analyses are rather unpleasant for governing ideologies.

    rc

  7. RW says:

    Setting ad hominem aside — focus on the person rather than their argument — the notion that Krugman is left-wing and strongly partisan would have been laughable several decades ago when he would have clearly been seen as a moderately-left centrist; e.g., Eisenhower would have had no problem making him a member of his economic team.

    That is how far the national polity and discourse has been skewed to the right: The political left is now considered fringe and out of the national debate; what used to be relatively close to the political center is now mostly seen as left-wing with moderate right now granted the title of “centrist” while what used to be rather far-right becomes simply right; utter, right-wing lunacy is now allowed into the debate because “they have a point” (and because many are so outrageous they help corporate media capture eyeballs).

    National problems would probably be much easier to discuss if we could pull back from this a bit and, as a typically optimistic American, I believe we can pull back. Still I am also reminded that it is quite possible for a civilized country to slide even further into the abyss and that this can happen when times are ‘only’ stagnant rather than in crisis too; e.g., http://tinyurl.com/krznd2 and http://tinyurl.com/nqyjt5

    In any case, Krugman has issued a challenge to his discipline that will be hard to ignore, His colleagues have learned to read him carefully even when they disagree with him in part because of the clarity of his language and his ability to handle more than one conceptual framework at a time; e.g., it is clear he is only a strong Keynesian when employment is in freefall and the economy is against the zero interest-rate boundary where monetary policy is helpless. In one sense this is a small debate within a much larger one but John Mauldin is right, it will likely have repercussions in future policy that an investor will want to be aware of.

  8. DeDude says:

    You got to give him credit for how simple he lays out the absurdity of the crap those idiots from Chicago has been spewing out for half a century. Any high school student could se how idiotic it was to think that markets would be efficient because human investors are rational??. Yet we had a head of the fed who believed in it and were considered the Maestro.

  9. Tom K says:

    So Barry, given your forecasting acumen, are we headed for a default on U.S Treasuries, hyperinflation, or neither?

    Why Default on U.S. Treasuries is Likely
    http://www.econlib.org/library/Columns/y2009/Hummeltbills.html

  10. BSNEATH says:

    How could anyone have comprehended that the NYC investment banks would create toxic assets and leverage up in an amount equal to 100% of the nation’s GDP?

    Of course economists got it wrong. It was unfathomable that bankers could be so irresponsible.

    And they keep rewarding themselves with bonuses………….

  11. Marcus Aurelius says:

    Th economists got it wrong because engaged in a guessing game which they present as science — measurement, observation and logic. In reality, economics is more akin to phrenology, horoscopes, and clairvoyance.

  12. KidDynamite says:

    it’s become quite clear to me that the VAST majority of economists and analysts to very little actual analysis, and instead are essentially horrendous statisticians – they try to take what happened last time and
    apply it to what will happen this time.. now, NORMALLY they do a pretty bad job (probably because they only have a handfull of data points), and now that all the rules have changed, they will do a HORRENDOUS job

  13. WaveCatcher says:

    The Neo Classicals made a tragic error when they put the Fed at the center of the government’s intervention in the free market. The Fed is ultimately responsible for many of our world’s problems. Ironically, the Federal Reserve Bank is not a bank and it is not a part of our Federal Government. It is just a tool used to protect the franchise of the too-big-to-fail banks and now the shadow banking system too.

    Do you think governments would be so quick to go to war if they had to finance the war effort from tax receipts rather than fiat money? No way.

  14. WaveCatcher says:

    Economists are no better or worse than any other prognosticator / forecaster. They are invariably wrong, but never in doubt.

  15. WaveCatcher says:

    Why did Krugman fail to mention more of the economists who actually sounded alarm bells well before the economy’s troubles were well known. Such as Roubini.

    Petty professional jealousy?

    Krugman is no better than the rest. Just another clown dressed as an economist.

    I would love to see a treatise on the group of economists, bloggers, traders etc. that actually saw this coming. The Great BR is definitely in this group. Schiller, Roubini, Mauldin, Hussman also.

  16. Onlooker from Troy says:

    WaveCatcher

    Indeed it is very ingenuous of Krugman (and others) to entirely dismiss the likes of those you pointed out. Granted nobody saw it with crystal clear clarity or pinpoint timing, but they saw it nonetheless. Another reason that makes me less likely to spend the time reading this article. That and my blood pressure doesn’t need the test. :)

  17. Onlooker from Troy says:

    Yes I know that “clear clarity” is redundant. oops

  18. Seattle Chill says:

    It’s striking to me the way that everyone, right or left, inflationist or deflationist, seems to believe that the world will quickly pass through this period of turmoil on to some sort of decisive resolution: either a return to rapid growth, a bout of hyperinflation, a round of mass defaults, or even a world war. With the notable exception of Steve Keen, I’ve yet to see anyone face the depressing possibility that this zombie economy could limp onward for many decades, in much the same shape as it is today. Growth could rise just enough to keep everyone from going bankrupt, without providing any kind of excess return for investors. Equity prices, commodity prices, bond yields, and stock dividends could all sink very low, and then just stay there for a very long time. I recall reading somewhere that markets will always do whatever harms the greatest number of investors; this scenario certainly qualifies.

  19. DeDude says:

    “The economists got it wrong because engaged in a guessing game which they present as science — measurement, observation and logic. In reality, economics is more akin to phrenology, horoscopes, and clairvoyance.”

    I don’t think it is that bad, although they cannot use things like double blinded placebo controlled experiments to test their hypothesis. They still have access to scientific approaches such as: critical evaluation of the consequences of a hypothesis (e.g., if this was true the this …[complete absurd thing]… would have to be assumed; or be the consequence). They can also take a critical comparison of previous reality and evaluate how well their models fit with that. Instead those clowns from Chicago dismissed any and all inconsistencies with a “oh that’s because we have never had a truly free economy”. You expect that kind of “argument’ from a high school dropout, not a professional scientist and university professor. So although I will admit that the nature of economy makes it harder to use stringent scientific approaches, I would not give economics professors a free pass to set the standards as “just polish up whatever turd drops out of you”. They can and should do better.

  20. call me ahab says:

    disregard 7:54 post- wrong thread

  21. Bruce in Tn says:

    “9. Factoring in excessive leverage and liquidity is exceedingly difficult from a traditional economic perspective (Derivatives especially)”

    Yep. We have a winner. More important than generally realized, IMO.

  22. call me ahab says:

    “Nothing like beating the MSM to the punch . . .”

    your joking? next you’ll be saying you out smarted Dennis Kneale or you beat Joe Battapaglia in the 100 yard dash ;-)

  23. cvienne says:

    @f411

    “Some historian, sociologist, or psychologist is going to make a mint writing a book about how the American economy was destroyed by brilliant men who based their world view on concepts that the average kindergartener can demonstrate as false.”

    Or, if you’re looking for other money making ideas, why not start with a “removal service”. You know… Like one that does the dirty work of removing unwanted bumber stickers from your Prius, or VW Beetle, (like the ones that say “Change we can believe in”)…

    Or you could “start” by creating a new slogan for a bumber sticker… Something like “Thanks for the cash sucka, we out” (for people needing adournment to their Ferraris)… Although your market there might be limited to East Egg…

  24. Trainwreck says:

    Punchline: “The Chicago School of Economics!”

  25. Moss says:

    Well we have all three main economic theories working overtime right now.
    Massive monetary machinations invoked by the Fed, check for Friedman.
    Massive tax cuts that were unfunded, check one for the Supply-side (voodoo school)
    Huge Stimulus, deficit funded, to stimulate demand, check for the Keynesians.

    So which one is working as designed?

    Without some effort, soon on reducing the deficit they are all equally ineffective.

  26. Bruce in Tn says:

    http://www.reuters.com/article/ousivMolt/idUSTRE5833WL20090904

    Double-dip recession risk rising: El-Erian

    “The risk of a double dip for U.S. economic growth in 2010 is increasing,” with a 50 percent chance of such a scenario next year, said El-Erian, who oversees $850 billion in assets for Pacific Investment Management Co, known as Pimco.

    …My wife says they spelled “inevitable” wrong in the above paragraph…they spelled it “increasing”…..

    …and the word “oversees” seems wrong for a Pimco manager of money…somehow it brings to mind Charlton Heston being whipped by an Egyptian overseer in a bible classic of some sort…Perhaps El-Erian does go out in the morning and take a whip to his money…but I doubt it…I guess I’ll just have to have the gray matter cleaned next week…

  27. Bruce in Tn says:

    Double dip ice-cream= good

    Double dip recession= not so much..

  28. Bruce in Tn says:

    I do think that Franklin, who oversees an extra 40 dollars/week courtesy of the Obama ATM and sees nothing but green shoots and El-Erian who oversees 850 billion and sees at least a 50% chance of a double dip recession soon, should be invited to debate here in the pages of the BP with Barry as moderator. We could invite Roubini, Ben, and Dennis to vote on who wins the debate.

    …As long as it is not on Monday Night Football night…

  29. investorinpa says:

    Speaking of thestreet.com, that place is a graveyard. The only thing worth reading is Kaas. They’ve resorted to sending 2-3 emails per day trying to get you to sign up for their service and terrible website. A few years ago, they had guys like Barry, Altucher, Kaas, Task, and several others making the site worth visiting…now, nothing. Guess its fitting for a site that once touted Lenny Dykstra as their options expert.

  30. danm says:

    e.g., it is clear he is only a strong Keynesian when employment is in freefall and the economy is against the zero interest-rate boundary where monetary policy is helpless. In
    ———–
    Since most if not all economic schools of thought typically focus on a couple of variables amid a sea of varibles that make up an economy, I am weary of any economist who clings to one shcool of thought throughout their entire career when circumstances change.

  31. [...] commentary: EconomistMom, Barry Ritholz, Paul Kedrosky, Brad DeLong, and Paul Krugman [...]

  32. danm says:

    I recall reading somewhere that markets will always do whatever harms the greatest number of investors; this scenario certainly qualifies.
    —————
    Our system is supposed to be capitalism, meaning that a small number of individuals reap the rewards produced by the masses.

    Somewhere along the way, our leaders told the masses to invest for its own retirement, with the idea that everybody would share in the profits and become a capitalist.

    The problem is that everyone got so caught up in the illusion and got busy working long hours and running after their tails that rare si the soul that actually took the time to think about the feasibility of this system.

    If everyone shares in the profits, then you’ve got socialism. But the system was never built to share, yet that is what the masses bought into. The proof is that we have not had such a large disprepencancy in wealth since the great depression. The masses have been duped.

    So yes, I also agree that the cleansing will end when there will be no more money to be lost. We’re definiltely not there yet.

  33. cewing says:

    I disagree with point #6. There seems to be a permanent conservative political bias in Washington when it comes to money.

  34. gdonlyknows says:

    Seattle @12:55 -

    I’ve been telling clients for years to expect a 12-14 yr downturn beginning sometime around 2008-2009 (missed the beginning by a few months).

    But, no one’s giving me Nobels and I’m too cheap to hire a PR firm to get me on CNBC.

    I just hope the trading swings during those years are big enough to catch.

  35. impermanence says:

    You people are thinking way too hard. Economists didn’t get it any “wronger” then do physicians that over-test and over-prescribe, then attorneys that over litigate, then accountants that do ‘creative accounting,’ and the greatest whores of all time, then the financial community who relentlessly churn accounts, etc. This is the wholesale sell-out of the entire American professional class.

    I know most professional people are intellectually impotent, but you would have to be a complete idiot to miss what was going on. This is simply the “thought leaders” of the professional class making excuse after excuse and excuse for incredibly un-professional behavior. What a pathetic joke.

  36. kaleberg says:

    Yes, Paul Krugman is politically biased. That’s just a synonym for generally correct, sort of the way that out of the mainstream means only supported by a majority of voters.

    One thing that has always bothered me about economics is that it is curiously stateless. As a systems person, I’m used to thinking in terms of evolving state with the various interaction rules driving the changes. In my real world exposure to economics, state is constant and paramount. How much money do I have? What is my life expectancy? What is the current contract? How much are their assets worth? Most economics seems to ignore all these types of questions, so you get a corporate statement with revenues and expenses but no assets or liabilities. It’s like doing physics without a concept for mass or electronics without the concept of charge.

    Both the fresh water and salt water economists seem to have a major oversight here.

  37. kaleberg,

    ‘Economics’, as learned by the majority of today’s Practioners, would be better understood as Politcal Science playing the Role of feudal liege to Finance.
    http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=feudal+liege

    IOW, it is, as you allude, missing Key Pieces. That gauziness adds opacity to Oz’ Curtain..
    http://www.thefreedictionary.com/Gauziness

  38. also, upon further reading, impermanence’s 411 blast @ 4:11, above, works, admirably, as an explanation, too..

  39. [...] The FT has a counterpoint to Krugman’s Sunday’s NYT magazine article: Why some economists could see the crisis coming (FT) From the [...]